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New Dividend Tax Rates: Explained

By Cheaper Accountant, Jan 18 2016 06:39AM

A fundamental change to the taxation of dividends will apply to Directors and Shareholders of Limited Companies from 6 April 2016. This will increase the tax paid by the majority of people who operate their own limited company. Despite these changes a limited company still offers the greatest tax advantages when compared to the National Insurance Rates which apply to sole traders and permanent employees.

Summary of Changes

On 6 April 2016 (the start of the new tax year) the current dividend tax credit will be removed and replaced with a new dividend tax rates. Many people currently receive a small salary with the remainder paid in dividends to ensure a minimal income tax bill. This strategy will now become more expensive (due to increased dividend tax) during the 2016/17 tax year.

A dividend tax allowance of £5,000 will be introduced meaning that the first £5,000 in dividends will be tax free.

Taxable dividends exceeding £5,000 will be taxed at 7.5% up to the higher rate threshold of £43k.

Dividends within the higher rate band will be taxed at 32.5% with dividends within the additional rate band (for very high earners) taxed at 38.1%.

How will this affect me?

A number of our clients typically receive a salary of around £8,000 in addition to dividends of around £32,000. In this example zero income tax was due but during the 2016/17 tax year a total of approximately £1,720 will be due in dividend tax and this would be the total income tax bill.

Does this affect the benefits of operating a Limited Company?

A limited company still remains very beneficial for the following reasons:

1. Dividend Tax at the Basic Rate is still lower than National Insurance Rates for the Self Employed and Permanently Employed.

2. Dividend Tax is calculated on company profits, whereas PAYE/NI is calculated on gross earnings.

3. You can claim all business related expenses.

If you are thinking about setting up a limited company one of our accountants can complete this for you and explain all of the tax charges applicable to you and your circumstances.